How Pricey Co-ops Get Better Deals Than Rentals at Tax-Time

A quick trip into the counterfactual: Let’s say Mayor Michael Bloomberg meets Governor Eliot Spitzer in an Albany coffee shop. Discreet place, the kind where people keep to themselves and no one notices things they’re not supposed to.

Mr. Bloomberg persuades Mr. Spitzer to lean on the State Legislature to alter the property-tax structure of New York City. (“You’re a steamroller, Eliot,” he coos. “If anyone can do it …. ”)

The State Legislature does, changing rules that have been in effect since 1981.

Suddenly, condos and co-ops are no longer assessed as rental buildings, and houses are measured for taxes at higher rates.

The city Department of Finance estimates New York’s property value at $802.4 billion for the coming fiscal year, which starts July 1. It could be worth a lot more, if some in city government had their way—and if the state, which sets the city’s property-tax structure, would listen.

But fundamental changes to the city’s property-tax structure seem as bloody likely as a new rent-controlled building along Central Park West.

“You don’t hear any talk of this in Albany,” said E.J. McMahon, director of the Empire Center for New York State Policy at the conservative Manhattan Institute. “It’s a real third rail.”

Indeed. The world’s richest apartment building (according to the 2005 Michael Gross tell-all), 740 Park Avenue, will pay less in taxes than some rental buildings.

Case in point: Under the current property-tax set-up, 740 Park will owe $1,963,085 in property taxes this year; the Capitol, a rental building in Chelsea, will owe $2,583,698.

And a townhouse on the Upper East Side that sold for $19 million last month will pay $2,144,244 in property taxes.

A house with a market value of $1 million would pay $9,670.80 in property taxes under the current structure; a co-op or condo building valued at the same amount would pay $57,316.50.

That’s using the straight equations from the Finance Department, where 6 percent of a house’s market value is taxed, while 45 percent of a condo, co-op or rental is taxable. And remember: The city must determine the market value of the condo or co-op by treating it as a rental.

Breaking it down even further, this time by the effective tax rate (the tax paid on every $100 of full market value), you’ll find that a plot of land in Manhattan assumes many different tax costs depending on what goes up on it.

A $1 million Manhattan property would owe $4,600 if it were a house, according to an analysis by the city’s Independent Budget Office. If it were a co-op, it would owe $6,800; and, if an elevator rental building, $37,200—or about eight times more than the house, even though they’re worth the same amount, $1 million.

Such disparities seem here to stay, despite the city’s concerns. Finance Commissioner Martha Stark told The New York Sun in December that “the property tax structure has to be fixed.”

She made those comments after an event organized by the nonprofit Citizens Budget Commission; Ms. Stark didn’t offer specifics during the panel for reforming the tax system, according to a research associate at the commission.

In an e-mail statement last week, a Finance Department spokesman was equally vague, though an undertone of frustration seeped through: “The Finance Department feels that assessments should be fair and transparent. At Finance, we want to make sure that people pay the right amount on time, and we have to make sure people understand their tax bill.”

Good luck with that. (Ms. Stark declined numerous requests for an interview.)

But it’s not the city’s fault; the state planted the kernels of confusion a generation ago.

The Legislature set the city’s property-tax structure in the early 1980’s, divvying up the five boroughs’ property into four classes and determining the market value for each in different ways. Condos and co-ops are valued as if they were rentals, leading to often-cheap taxable values for expensive properties (the 740 Park example); homeowners have a lower burden than everyone else (the Upper East Side townhouse example).

To alter this structure, the state would need to make sweeping changes that would likely upset many voters in the process—namely, those condo, co-op and (especially) single-family homeowners, many of them in the outer boroughs, who have accustomed themselves over the last quarter-century to an artificially lower property-tax burden.

This is a powerful constituency that’s grown wealthier as property values have increased, particularly in this decade.

“What you have to understand is, they deliberately made it this way,” said Mr. McMahon of the State Legislature in the early 1980’s. “New York City’s property-tax structure is deliberately designed to minimize the taxes on single-family homeowners in Staten Island and Queens.”

Still, the city would like to see changes through the state. One city source told The Lab earlier this month that, when it comes to assessing property taxes, “a home should be a home should be a home.”

But reality intervenes, and the politics of the State Legislature trump any likely changes that will bring 740 Park in line with, well, your random high-rise rental.

And the Governor will likely have only a rain check to offer the Mayor on that kaffeeklatsch.